Structures and Buildings Allowance (SBA) – a Project Finance guide 4 Mar 2019
Structures and Buildings Allowance (SBA) will be good news for some in the PPP and Project Finance arenas, but others will need to wait and see what the more detailed legislation brings.
HMRC and HM Treasury held meetings in December and January with various stakeholders to consult on the key issues, one of which I attended.
Will it apply to your project? Let’s find out.
New allowance at 2% per annum on relevant capital expenditure
Many types of PPP Infrastructure will benefit, but not all
Property and buildings that function as dwellings will not qualify for the SBA
SBA will provide a cashflow timing benefit
The surprise announcement of the last budget – namely a new tax allowance for structures and buildings which will form part of the UK’s capital allowances suite of reliefs – has been included in the Finance Act 2019, which received Royal Assent on 12 February 2019. The relief is already operational, although the Act itself is still light on detail.
What is the SBA and what does it mean for Project Finance?
The SBA is designed to reduce the cost of doing business in the UK and improve its competitiveness. The aim is to encourage investment in the construction of new structures and buildings that are intended for commercial, non-residential use.
Most of the detail disclosed to date can be found in the Government’s technical paper of last October. Treasury regulations are awaited to flesh these out. For PPP projects that claim tax relief via capital allowances rather than the composite trader route, the new SBA merits some attention.
PPP infrastructure which will benefit
Relief will not be available for structures or buildings where a contract for the physical construction works was entered into before 29 October 2018 (budget day). New PPP projects of eligible infrastructure types should now consider factoring in the relief.
Good news if your project infrastructure comprises any of the following:
Uncertainty for the Waste Sector
We are seeing quite a bit of activity at present in waste recycling and energy from waste facilities, and we would hope these are intended to qualify for the SBA as commercial structures, although this type of infrastructure is not specifically mentioned in the technical note.
Property and Buildings that function as dwellings will not qualify for the SBA
The Government’s current proposal is that university accommodation, military accommodation and prisons would not qualify for the allowance.
PPP aficionados will recall that there were similar discussions around the definition of “infrastructure” for the Public Infrastructure Exemption (PIE) when the Base Erosion and Profit Sharing (BEPS) rules were introduced. That definition, which became part of the Taxation (International and Other Provisions) 2010 Act included:
Housing accommodation (armed forces or police force residences)
Buildings (or parts of buildings) that are part of a UK property business and are let (or sub-let) on a short term basis to unrelated parties
It is hoped that the Government will extend the SBA regime to those types of infrastructure which are eligible for the PIE under the BEPS regime, but which are currently excluded from the initial technical note.
Multi-purpose student accommodation – one to watch
The buoyant student accommodation sector is one where we are waiting to see the Government response to representations, as this type of infrastructure is used for different purposes outside term time often in a way similar to hotels which will qualify for the SBA.
It is proposed that shared areas which cover both use as a dwelling and commercial use will not qualify for the SBA.
This differs from the treatment of communal areas now, where assets in such areas can qualify for capital allowances. Where buildings are partly used for commercial purposes, and partly for residential, then relief will be apportioned to the commercial elements.
No SBA will be available at all if the residential parts of the building constitute more than 10% of the total.
SBA: How will it work?
The relief will be given over 50 years at 2% per annum on a straight-line basis for eligible construction costs incurred after 29 October 2018. Relief can also be obtained on the improvement of existing structures and buildings, including the cost of conversion or renovation. If relief is not claimed, it will not be carried forward to a later period, but will be lost.
The claimant business must have a qualifying activity, which includes a trade, a UK or overseas property business, and a ring-fence trade such as oil and gas.
Tax relief will also be available for overseas structures and buildings where the business is within the charge to UK tax.
The claimant will need to have an interest in the land, though the land itself will not attract any SBA.
How the SBA interacts with other Tax Reliefs – three step approach
1. Projects will need to separate out their capital expenditure in more detail and consider the hierarchy of available reliefs.
2. Integral features and fixtures within a structure or building, such as its lighting or heating system, will continue to qualify for relief as plant or machinery and will not be taken into account for the SBA.
3. SBA expenditure will not qualify for the Annual Investment Allowance (AIA).
It is therefore important to segregate expenditure into costs deductible in calculating profits chargeable to corporation tax, costs qualifying for plant and machinery allowances, costs which fall under the AIA and costs eligible under the SBA.
Things to consider on a Change in Ownership
As many structures and buildings will not remain in the same hands for 50 years the regime intends to transfer the claiming of the relief to the subsequent purchaser on sale. Unlike the old industrial buildings allowance there will be no balancing allowances or charges, though the building will still need to be used for non-residential purposes or the allowance will be lost.
For any chargeable gains calculation when the asset is disposed of, the allowable cost of the asset will be reduced by the total amount of relief claimed under the SBA.
It looks like the SBA will be a cashflow timing benefit. In many instances it will be a tax deferral rather than an absolute saving.
My take away from the consultation process is that the definition of infrastructure that will qualify for the SBA is key for the Project Finance industry.
I hope that the Government will reconsider the definition of eligible infrastructure, and that this will be reflected in the Treasury regulations promised in the Finance Act 2019. I understand that a draft of the regulations for consultation is expected to be released to coincide with the Spring Statement on 13th March 2019.
If you have any questions about the SBA and would like to speak to me or a member of the Operis Accounting and Tax team about how it might affect you, please get in touch.
*Since writing this blog, an update to the Structures and Buildings Allowance has been announced. Click here to read the final legislation.